On September 9, 2009, we wrote an article titled “Silver Should be the Focus.” In that article, we cautioned readers to “be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out the dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be ‘head to the exits.’”
The first salvos of the coming war to attract investors to precious metal stocks have been initiated. In April 2011, Newmont Mining (NEM) started what it deemed “… the industry's first and only dividend policy linked directly to the realized gold price…" Naturally, this isn’t the first time that gold-linked dividends have existed, but it sells really well to those unfamiliar with gold stocks and their dividend policies. On September 19, 2011, Newmont Mining announced a further enhancement of the “first ever” gold linked dividend policy with the following changes:
The enhanced policy will continue to link the quarterly dividend rate to changes in the gold price but will also provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000. At average realized gold prices below $1,700 per ounce, the current dividend policy remains unchanged. Newmont's quarterly gold price-linked dividend payments are based on the Company's average realized gold price for the preceding quarter.
The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.
Newmont Mining and Hecla Mining are soon to be joined by a crowded field of precious metal companies that are going to progressively up the ante. It will soon be indistinguishable which has the most sensible dividend policy and which has a compounding “money” losing machine. The race to offer attractive dividend payments has help from an unexpected source.
Unlike past precious metal bull markets, gold and silver stocks have stiff competition for investment capital in the form of gold and silver ETFs. In fact, more money is being plowed into the combined gold and silver ETFs than the stocks that have actual claims on getting the metal out of the ground. This presents a challenge for precious metal stocks that would normally issue shares in acquisitions of other gold companies or expand their operations. In order to get the share price up, a competitive environment of dividend increases will lead many companies to ruin in an effort to attract new investors.